Insurance companies and banks are often compared to one another. Both need to underwrite a customer. Banks underwrite to fund capital or access to capital. Insurance companies do the same when there is loss that needs to be funded. Thus, the insurance company is often called a crisis banker. Another similarity is that losses/profits for both banks and insurance companies are spread between the total number of customers. Pricing therefore is key.
Insurance Policy = Bank Loan or Line of Credit
The insurance policy is essentially a bank loan or line of credit. Basically, total of all policy limits = total loan amount. The premium charged is the fee to access the full loan amount if needed. The rate charged is underwritten based on market conditions and historical credit rating or in the case of insurance the losses from prior claims.
This example is fairly straightforward when viewed as one annual policy period. However, the future length of extending the loan terms is generally unknown so it forces the issue on each renewal. In other words, how long an insurance company wishes to continue to extend satisfactory terms is unknown.
The Underwriter's Point of View
Every underwriter that originates a loan/policy is going to need to defend the loan to bank/insurance company management. In the case of a bank, if the loan terms are appropriately applied, and the loan agreement is well underwritten, it should be jointly beneficial for each party. In the case of an insurance carrier, if losses mount or the loan amount cannot be repaid the loan or line of credit is non performing.
Thus, when a bank or insurance company prices itself out of the running, or fails to renew its commitment, it is often because the losses have been too high or they have not built enough rate into the program. Hence, they did not underwrite the loan properly to begin with.
Why do some bank/insurance company relationships last for dozens of years through many cycles and others for only a year?
The main factors really come down to trust and sound underwriting. Both sides in the proposition understand the expectations. They did proper due diligence and established a sound loan program with proper expectations of performance. When the market cycles or money/loan capacity gets lean, or performance on the loan are not positive the relationship endures because of trust. Terms are adjusted to make it palatable on both sides. In both the insurance and banking world this type of partnership is very valued.
As we live through tough economic times the one thing that rises to fore is the valuable lesson of proper loan underwriting. Finding a way to build the right policy "loan" terms, do the proper due diligence, and understand the expectations will be rewarded via a long term relationship.
Wisconsin businesses, for more information on establishing a broker relationship that encompasses exceptional coverage, the proper due diligence and lasting relationships that positively affect your bottom line, contact Knowledgebroker Scott Huibregtse.
